Analysis of Simkin v. Blank
The front page of the New York Times (May 31, 2011) contains a great story by Peter Lattman, quoting me, on the pending case of Simkin v. Blank. The question is whether a divorce agreement based on the assumed existence of an invstment account with Bernie Madoff’s firm can be rescinded due to mutual mistake.
A few of the many comments on Mr. Lattman’s article disagree with my quote in the article that the case is strong for mutual mistake. Absent space in the New York Times to explain, following is an elaboration of this position. It is one of the 45 stories about recent contracts disputes in my forthcoming book, Contracts in the Real World: Stories of Popular Contracts and Why They Matter (Cambridge University Press 2012).
Among investors stung by Madoff’s scam were Steven Simkin, a prominent New York real estate attorney with the firm of Paul, Weiss, Rifkind, Wharton & Garrison, and Laura Blank, a distinguished lawyer working for the City University of New York and heiress to the fortune of the neckwear manufacturing company, J.S. Blank. After 30 years of marriage and raising two children, Steven and Laura separated in 2004, not long after Laura’s mother had died. To finalize their divorce, on June 27, 2006, Steven, who lived in Scarsdale, and Laura, who lived in Manhattan, signed an agreement dividing their property.
In their negotiations, the couple listed their marital assets, including four cars, the Scarsdale and Manhattan homes, and millions in bank, securities and retirement funds, including their investments with Madoff. The homes and cars aside, it appeared that the couple’s total assets amounted to $13.2 million. The agreement provided that Steven would keep most assets in exchange for paying Laura $6.6 million in cash. Thirty months later, when Madoff’s Ponzi scheme was exposed, they discovered that the value of the investments was overstated by $5.4 million because of it.
After Madoff confessed, Steven wanted to rescind the settlement agreement with Laura and redo that part of their deal. He also wanted payback from Laura of $2.7 million, half the amount of their earlier valuation of the Madoff account. Laura refused. Steven said the $5.4 million was a fiction, though they did not know it in 2006. So, Steven argued, Laura got a windfall. For her part, Laura argued that they were not mistaken at all in 2006, because the account did exist then. From Laura’s perspective, the losses arose only in late 2008 after Madoff confessed. By 2008, of course, Steven was the account’s sole owner. Though a superficially close case, Steven had the better of the argument.
People entering bargains are generally held to them, but an exception applies if both parties were mistaken when they made their deal about a basic assumption that materially affects the exchange. In such situations, under the doctrine of “mutual mistake,” either side can void it, so long as the risk of the basic assumption was not taken by one party, but agreed to by both.
A good example involved a coin deal. Beachcomber Coins paid $500 to another coin dealer, Boskett, for a rare dime supposedly minted in 1916 at Denver, signified by a “D” etched on the coin’s reverse (“tails”) side. Boskett had acquired the dime, along with two modest coins, for $450. He told a Beachcomber representative he would not sell it for less than $500. The representative studied the coin before buying it.
Afterwards, another buyer offered Beachcomber $700 for it, subject to getting a genuineness certificate from the American Numismatic Society. The Society declared that the “D” on the coin’s reverse side was counterfeit. Beachcomber wanted to rescind its deal with Boskett, citing mutual mistake. Boskett refused, claiming that customary coin dealing practice called for dealers buying coins to do their own investigation and take all risks: caveat emptor, Latin for “let the buyer beware.” The New Jersey Supreme Court held that the case fit the mutual mistake excuse to a tee, and, accordingly, rescinded the sale.
Both sides assumed the coin was a genuine Denver-minted dime. This assumption was central to the pricing and both were mistaken about it. True, contracts can allocate risks of mistake to one side or the other. That happens when parties throw up their hands about whether some assumption is true or false. When people say things like “we’re not sure,” “we’re uncertain,” or “it’s a matter of judgment,” they are consciously allocating a known risk.
In the coin case, however, both sides committed to a specific deal about mintage, neither indicating uncertainty about its authenticity and both assuming the coin was the real thing. Two factors reveal that both parties thought the coin was real: one, Boskett bought the coin for just less than $450, and two, Beachcomber’s rep examined it for some time and then forked over the hefty price. . . .
The Madoff account is much like the dime. The parties in each case thought something was real—an account with securities in it, a dime minted in Denver. Both were mutually mistaken because of someone else’s fraud and traded something different from what they thought they were swapping. Enforcing either contract would let happenstance of fraud, rather than intention, determine what bargains are made and how gains are distributed.
Neither case involves questions about what the dime or the account are really worth, how value fluctuates in markets, or how different people may assign different values. A mere change in the market value of exchanged property does not justify excuse for mutual mistake. Beachcomber couldn’t rescind its coin deal by saying the rare coin market had plummeted and Steven couldn’t rescind his agreement with Laura based solely on a decline in the stock market.
Laura said there was no mistake when she and Steven signed their contract in 2006. They thought there was an account and there was, she said. Steven withdrew funds from it in 2006 and added funds before 2008. An account can exist although money deposited into it is not the same money that is paid when funds are withdrawn. Even after December 2008, the account “existed” in many senses. The account was the basis for Madoff customers to claim under a securities investor protection fund and it determined which customers had to return redemptions to the fund. . . .
Steven countered that the case was a “textbook example of a mutual mistake.” If a real account existed, there would be no mutual mistake, Steven allowed, and value declines his risk to take. But no real account ever existed. It was irrelevant whether the fictional account had some value for some time. Though withdrawals could be made, the money would have been stolen from others. . . .
By textbook example, Steven had in mind the landmark case that put mutual mistake firmly on the books. It involved the sale of a blooded, polled Angus cow named “Rose 2d of Aberlone.” Both parties, the seller Hiram Walker, who ran the liquor business that distributes Canadian Club Whiskey, and T.C. Sherwood, a prominent banker who became Michigan’s first banking commissioner, assumed the cow was barren and useless as breeding stock. The contract price was $80. Right before the cow was to be delivered, however, she produced a calf.
Now valued as a breeder, Rose 2d of Aberlone was worth $750. The court held that the seller could rescind, as the mistaken belief that the calf was barren was the basic assumption of the deal, indicated by the pricing of the cow, showing that the two had a specific set of bovine attributes in mind that turned out to be incorrect. Mutual mistake applied because mistaken beliefs about a bargain would result in the incorrect distribution of benefits.
The same was true in the case of Steven and Laura. Their bargain was to split economic value both parties thought to be $5.6 million. They were both innocently mistaken about that. In reality, there was nothing to split. There were no investments, securities, or returns or losses, and without those attributes the idea of an account is a nullity. Fraudulent institutional account statements are not a risk parties reasonably perceive or should prudently guard against in forming contracts. To hold parties to those terms after discovering the error is to hold them to a bargain they did not intend to make. . . .
[The piece goes on to discuss a renowned case about violins, which Mr. Lattman referenced in his New York Times piece, where both parties vouched that they were buying and selling a Stradivarius that turned out to be a fake, illustrating mutual mistake as a basis to rescind a contract.].
Like the violin case or the cattle deal, Steven and Laura’s divorce settlement agreement was a model case of mutual mistake, resulting in rescission. Though ancient cases put caveat emptor in a rarified place, modern doctrines mediate it. Bargains today that amount to happenstance, rather than actual intentions of both parties, can be rescinded. When parties make a deal based on a shared central assumption that proves to be wrong—whether the parties are coin dealers, cattle traders, violin collectors, or divorcees—they are entitled to rescind it. The doctrine of mutual mistake protects the benefit of bargains people intended to make while freeing them from those they did not.
Beachcomber Coins, Inc. v. Boskett, 400 A.2d 78 (N.J. 1979).
Sherwood v. Walker, 33 N.W. 919 (Michigan 1887).
Smith v. Zimbalist, 38 P.2d 170 (Cal. App. 1934).